The cost of debt
By: Jules H. van Binsbergen, John Graham, Jie Yang
Contributors: Graham, John; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16023; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16023.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We estimate firm-specific marginal cost of debt functions for a large panel of companies between 1980 and 2007.  The marginal cost curves are identified by exogenous variation in the marginal tax benefits of debt.  The location of a given company's cost of debt function varies with characteristics such as asset collateral, size, book-to-market, asset tangibility, cash flows, and whether the firm pays dividends.  By integrating the area between benefit and cost functions we estimate that the equilibrium net benefit of debt is 3.5% of asset value, resulting from an estimated gross benefit of debt of 10.4% of asset value and an estimated cost of debt of 6.9%.  We find that the cost of being overlevered is asymmetrically higher than the cost of being underlevered and that expected default costs constitute approximately half of the total ex ante cost of debt"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/1/2010.

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